Bank of Korea Buys Special Bank Bonds... "Reassurance to Market" vs "No Effect" (Comprehensive)

Concerns Over Signals of Liquidity Supply Expansion... Facing a Funding Squeeze Crisis

[Asia Economy Reporter Kangwook Cho] The financial sector's reactions are mixed regarding the Bank of Korea's decision to expand liquidity supply through the purchase of special bank bonds. While some view it positively as it facilitates easier liquidity procurement and reassures the market, others believe the direct impact may not be significant. This is because if financial institutions immediately sell the policy banks' bonds they hold, it could send a negative signal suggesting a potential liquidity crunch.

According to the financial sector on the 14th, special bank bonds such as San-geum bonds and Su-geum bonds issued by policy banks in Korean won will be included as eligible securities for the Bank of Korea's open market operations starting today. This is the first time since the 2008 global financial crisis that the Bank of Korea has expanded the scope of eligible securities for outright transactions to include special bank bonds.

It is estimated that the total amount of Korean won bonds issued by two policy banks, Korea Development Bank and Export-Import Bank of Korea, circulating in the domestic market exceeds 120 trillion won. Among these, San-geum bonds issued by Korea Development Bank account for about 101 trillion won, making up the majority. As of the 9th, commercial banks hold the largest amount of San-geum bonds at 41.8 trillion won. Following them are pension funds and insurance companies with 16.1 trillion won, investment trusts with 14.7 trillion won, and mutual savings banks with about 3.1 trillion won. Although Korea Development Bank's annual issuance limit for Korean won bonds is around 70 trillion won, the actual issuance amount is much lower. Additionally, the circulating amount of Su-geum bonds issued by the Export-Import Bank of Korea is estimated at about 20 trillion won, with an average annual issuance volume of approximately 10 to 11 trillion won.

However, this does not mean that the Bank of Korea will directly purchase Korean won bonds issued by special banks in the future. It refers to purchasing Korean won bonds already issued by Korea Development Bank and Export-Import Bank of Korea and circulating in the market. In other words, if financial institutions such as banks or securities firms wish to sell special bank bonds they hold to the Bank of Korea, the Bank will buy them.

The Bank of Korea analyzed that this measure will increase the liquidity of special bank bonds and expand the demand base, thereby facilitating smooth capital circulation in the bond market. By supplying funds to financial institutions through the purchase of special bonds, policy banks can issue bonds at lower interest rates, and if the funds raised are used to purchase corporate bonds, it can contribute to stabilizing the bond market.

Commercial banks also view this positively as a preemptive safety measure against worsening market conditions.

A representative from Bank A said, "The Bank of Korea's purchase of special bank bonds circulating in the market is expected to make it easier for commercial banks and others to raise funds," adding, "From the policy banks' perspective, demand for issued bonds can increase, which may indirectly lower the issuance spread."

On the other hand, some argue that the immediate direct effect may not be significant.

A representative from Bank B said, "Special bank bonds like San-geum bonds and Su-geum bonds always have high demand in the market," adding, "While there may be long-term effects, the current situation is not such that selling special bank bonds would secure liquidity."

There are even concerns that selling special bank bonds at this time could send a negative signal to the market.

A representative from Bank C said, "The Bank of Korea's policy seems to be symbolic, aimed simply at preparation," adding, "If commercial banks sell special bank bonds to secure liquidity, the market may interpret this as experiencing a liquidity crunch, which could have adverse effects."

Researcher Miseon Lee from Hana Financial Investment noted, "In October 2008, the Bank of Korea included bank bonds and special bonds in the securities eligible for open market operations, but did not distinguish between repurchase agreements (RP) and outright purchases, and outright purchases were actually limited to government bonds. Therefore, this is the first time special bank bonds and Korea Housing Finance Corporation MBS are included as outright transaction securities," adding, "This will reduce bank bond credit spreads and, with some time lag, contribute to stabilizing the corporate bond market."

This content was produced with the assistance of AI translation services.